Is trade gap worse than thought?

THE bad news is that, officially, Britain's overseas trade position is awful. The worse news is that, unofficially, it could be abominable.

On Tuesday, the Pink Book, the official annual digest of Britain's balance of payments, is to be published. It is expected to confirm that the trade gap is yawning to a record £20bn this year - nearly £850 for every household in the country.

This figure measures the extent to which the country's surplus on trade in services such as insurance, tourism and banking - the so-called invisible goods - is outweighed by a chronic deficit on trade in visible products.

But as the trade position has deteriorated from a small surplus in 1997 to whopping deficits in 1999, 2000 and 2001, there has been one bright spot: trade with the eurozone countries in visible goods - from aero engines to pop CDs - rather than services. In 1998, our visible trade deficit with the bloc of EU countries that were later to sign up to the single currency zone was £6.5bn. The deficit with the rest of the world was £15.2bn.

The following year, our eurozone trade gap was barely changed at £6.6bn, while the gap with the rest of the world hit £20.2bn.

Last year, the gap with the eurozone had narrowed to £2.8bn - but with the rest of the world it topped £26bn.

More recently, the picture apparently has brightened further. In July, our trade in goods with the eurozone was balanced, neither in surplus nor deficit. With the rest of the world, it reached £2.5bn.

This was always a mystery. After all, the one currency against which sterling was most obviously overvalued was the ailing euro, and our manufacturers lost no opportunity to bewail the damage done to our exports by the strong pound.

Yet here, apparently, was Britain's one exporting success story. One explanation was that the single European market had forced firms to specialise, so they were playing to their strengths. But in recent weeks a second has been advanced - the figures are simply wrong.

Early last month, private research group Oxford Economic Forecasting used figures gathered by the European Union's own statistics agency, Eurostat, to estimate that the true deficit has been much higher during the past five years. For 2000, the figure could be nearer £20 billion than the Office for National Statistics' £2.8 billion estimate, it said.

Since then, the ONS has been working behind the scenes to explain the gap. It does not accept the OEF figures, but Financial Mail has learned that, using Eurostat's methods, the ONS's own calculations up to 1999 show a smaller, though still enormous, difference between the British data and those issued by Eurostat.

The ONS has made no calculation beyond 1999 and still believes its original numbers are the right ones.

It has no plans to issue a parallel series of figures using the Eurostat/OEF methods of calculation, and there will be no mention of the controversy in this week's Pink Book.

But it accepts that, even when it has 'corrected' the OEF figures, the difference is still very large.

A source said: 'There's no getting away from it. There's still a discrepancy though it is a lot smaller. That said - we are still talking about a lot of money.'

The ONS is working behind closed doors to iron out the huge differences between the two sets of figures, and it is trying to interest its sister agencies elsewhere in the EU in trying to ensure that statistics for trade within Europe agree with each other.

Gathering such figures inside the single market is notoriously tricky; unlike other trade figures, they are collected from VAT returns rather than from Customs figures at ports and airports.

But the growing doubt over Britain's apparently healthy EU trade position could hit sterling at a time when interest rates are low and consumer demand roaring ahead. That, in turn, could stoke inflation.

OEF managing director Adrian Cooper said: 'We don't say that either the Eurostat or the ONS figures are right. We simply did not understand how the EU trade picture could look so good. We wanted to find out what was going on in the economy'.